RadioShack 1Q profit drops 85 percent

DAVID KOENIG

Published
7:00 pm CDT, Thursday, April 20, 2006

AP Business Writer

RadioShack Corp. said Friday its first-quarter profit plummeted 85 percent on disappointing sales of cellular phones and a write-down of the electronics retailer's assets and inventory. Its shares briefly sank to a 52-week low but rebounded later in the day.

Executives said they were disappointed in the results but will not alter the turnaround plan that they announced earlier this year, including closing hundreds of stores and replacing about one-fifth of the products on store shelves.

RadioShack said it earned $8.4 million, or 6 cents per share, for the quarter ended March 31 compared to $55 million, or 34 cents per share, a year earlier. Analysts were expecting 17 cents per share, according to Thomson Financial.

Revenue rose to $1.16 billion from $1.12 billion a year ago.

Sales at stores open at least one year, a key measure for retailers, fell 1 percent.

"While we knew first quarter would be weak, the results are worse than we anticipated," said acting Chief Executive Claire Babrowski. "We clearly have a lot more work to do to get this company back to levels of profitability which we all expect."

Babrowski said the results would not change the company's belief in a turnaround plan announced earlier this year, which includes closing 480 stores.

But, she warned in a conference call with investors, "We are likely to have a couple more challenging quarters before we start seeing the financial benefits of the plan."

After the report, Standard & Poor's lowered its rating on RadioShack debt to one level above non-investment grade or junk status. Analyst Diane Shand cited weaker results and doubts about a quick turnaround.

Michael Baker, an analyst with Deutsche Bank, said the first-quarter results "were worse than expected across the board," even though he had lowered his expectations before Friday.

Baker said in a note to clients that he expects more near-term backsliding in RadioShack's stock price and financial performance because expenses are rising while profit margins shrink.

RadioShack shares fell 25 cents, or 1.4 percent, to close at $17.79 on the New York Stock Exchange. They sunk briefly to a 52-week low of $17.18 earlier in the day.

RadioShack has closed about 40 stores and plans to shutter another 440 by the end of August, and it will close distribution centers in South Carolina and Mississippi.

The chain plans to liquidate about one-fifth of its inventory, including dated items such as electronic organizers, and replace them with things such as HD radio, MP3 music players, and wireless devices that use the Bluetooth standard.

Babrowski said her top priority was fixing RadioShack's crucial wireless business. RadioShack switched from Verizon Wireless to selling phones and service for AT&T Inc.'s Cingular Wireless in January, and Chief Financial Officer David Barnes said the chain was still learning to sell Cingular effectively.

The chain hopes to lift sales with some exclusives such as pearl-colored Razr phones from Motorola Inc. for Mother's Day and localized offerings such as weather radios along the hurricane-prone Gulf Coast.

RadioShack plans to cut advertising spending by more than 10 percent _ from $260 million last year to between $220 million and $230 million. Some of the reduction will fall on television spots, which don't drive consumers to the stores, Babrowski said.

The company is also trying to fix problems in an automated store-staffing program that led to higher labor costs in the first quarter. And the company took first-quarter write-downs on the inventory it is liquidating and on store closings, reducing pretax income by about $10 million.

Babrowski bristled at recent reports that the company was abandoning high-margin items and trying to emulate big-box retailers such as Best Buy. Neither is true, she said.

Babrowski, a company director, stepped into the CEO's office in February, when David Edmondson was forced out after lying on his resume. Chairman Leonard Roberts, who groomed Edmondson for the top job, announced last week that he will retire next month.